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Apart from making your purchases on these platforms expensive, it will also mean sellers will have to face the brunt of reduced cash flows amid already low margins for some.
Experts said the proposal, which will take effect on April 1, 2020, and will be inserted as a new section in the Income Tax Act, is expected to affect the working capital of e-commerce companies and reduce cash flows for e-sellers.
Illustration: Dominic Xavier/Rediff.com.
The government’s proposal in the Budget to impose a new levy of 1 per cent tax deducted at source (TDS) on e-commerce transactions, would increase the burden on e-commerce companies such as Amazon, Flipkart, Uber, Myntra, Zomato, Swiggy and others, as well as their sellers on such platforms.
Apart from making your purchases on these platforms expensive, it will also mean sellers will have to face the brunt of reduced cash flows amid already low margins for some.
Experts said the proposal, which will take effect on April 1, 2020, and will be inserted as a new section in the Income Tax Act, is expected to affect the working capital of e-commerce companies and reduce cash flows for e-sellers.
Experts further said that e-commerce companies already deduct 1 per cent TDS under the Goods and Services Tax Act.
Salman Waris, managing partner at New Delhi-based specialist technology law firm TechLegis Advocates & Solicitors, said the proposed new levy of 1 per cent TDS on e-commerce transactions under the Income Tax Act will further affect the ‘working capital’ of e-commerce companies and reduce ‘cash flows’ for e-sellers.
“Hence unless there is a relaxation of existing processes involved, this provision will be an additional compliance burden and further increase the cost of compliance for e-commerce companies,” said Waris.
The budget documents define an e-commerce operator as "an entity owning, operating or managing the digital platform". They also define an e-commerce participant as a "person resident in India selling goods or providing services or both, including digital products, through digital or electronic facility or platform for electronic commerce". This makes the definitions wide ranging.
“Cash will be stuck with the government in the refund system affecting the sellers, most of whom are small micro, small and medium enterprises,” said an executive who did not wish to be quoted.
“Tax was already being deducted under GST laws and the government had all the data to check any suspected tax evasion. Now, the levy of TDS under income tax will add to compliance burden of e-commerce companies, reduce cash flow even more for SMEs and with no incremental transaction data for the government,” he said.
The most obvious impact will be on marketplaces like Amazon and Walmart-owned Flipkart.
An Amazon India spokesperson said the company was studying the details and would reach out to the government for clarifications.
“We hope the tax regime is simple and uniform so that millions of small and medium businesses can go online, digitise their operations and continue to contribute to growing the economy,” the spokesperson said.
Flipkart also said it was studying the details, particularly how it impacts the MSMEs and sellers on its marketplace platform. “We will discuss further with our seller partners and engage with government and other stakeholders in due course,” said a Flipkart spokesperson.
Impact on sellers
Though the 1 per cent TDS will not apply to sellers on the platforms who have total annual sales exceeding Rs 5 lakh, it will still hit a substantial number of sellers.
Kumar Rajagopalan, chief executive officer of Retailers Association of India (RAI) said the move can enhance traceability of seller transactions on marketplaces which is very essential to weed out fly-by-night sellers.
“However this can create a cash flow situation for genuine sellers, too. Ideally, the requirement should have been GST instead of TDS,” said Rajagopalan. “Most retailers have net profit margins of about 3 per cent and this means that 33 per cent of their net income has been blocked as TDS,” Rajagopalan added.
Daksha Baxi, head, international taxation, at law firm Cyril Amarchand Mangaldas, said the provision is also aimed at ensuring that all information relating to earning of income by anyone is captured and the minimum tax, is collected.
“This would indeed increase compliance on e-commerce operator and tie up at least 1 per cent of cash receivable by the seller or service provider,” said Baxi.
“It is however available as credit against the tax payable on income by the recipient both against advance tax and against final tax. So while it increases painful processes and cash blocking, it is one of the measures to address the low tax collections and belief of the government that income is under-reported," Baxi said.
Ankur Pahwa, partner and national leader, e-commerce and consumer internet at EY India, said the provision will result in cash blockage for sellers, especially those who operate with minimal margins.
“While lower withholding Tax (WHT) could be sought from the tax authorities by such players, the process may be cumbersome and time-consuming,” said Pahwa. He said WHT compliance and related costs would increase for the market platform players.
Anil Talreja, Partner, Deloitte India, said the provision may necessitate e-commerce operators to re-visit their model, contracts and systems to ensure compliance, given the enormous volumes transacted by way of e-commerce.
“Moreover, sellers or providers of services on e-commerce platform may also face cash flow challenges in terms of money being blocked upfront on account of withholding,” said Talreja. “Sales returns could increase the challenges for the sellers as well as the e-commerce operators, depending on the approach to be applied.’’
Global pushback expected
The latest move could also ruffle some feathers at the World Trade Organization which has since 1998 regularly placed a moratorium on imposing customs duties on electronic transmissions.
But India has argued at the top body for international trade that the perpetual moratorium forces countries to give up their right to tax burgeoning transactions and lose revenues.
Currently, multinational payment service providers like Visa and Mastercard control the underlying the architecture of most payment gateways. Since India is expected to see a sharp rise in digital payments over the next few years, the government considers not taxing transactions a lost opportunity. Now, rather than imposing customs duties, the government has gone in for a change in the income tax law.
Earlier, New Delhi had hinted that it is willing to tax electronic transactions through Section 9(1)(i) of the Income Tax Act.
